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us stock market, stock watch
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11/22/05 Investment House Daily
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Investment House Daily Subscribers:
Holiday Schedule:
Monday, Tuesday: Report as usual.
Wednesday: Market summary, continuing play tables
Thursday: Market closed.
Friday: Market open half session. No report
Reports resume Monday.
MARKET ALERTS:
Target hit alerts: ESLR
Buy alerts: ARW; HCSG; ASML
Trailing stop alerts: WCC; PETS
Stop alerts: INFA; TGT
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SUMMARY:
- Market sleepwalks until FOMC minutes, then rallies on rising trade.
- Fed tries to show it understands the rate cut too far, and acknowledgement sends stocks higher.
- Retail sales suddenly sprucing up ahead of holiday season.
- SOX, SP600 try but come up just short of new highs. Can they push through and further the overall rally?
FOMC gives market an early present, at least that is how the market takes it.
Stocks were stumbling around all morning, trying to figure out what to do after a breakout by NASDAQ and SP500 and four weeks of gains under the belt. Oil was higher (58.84, +1.14) and financial and interest related stocks were on the defensive, giving the market an overall sluggish early session. Even good news from the retail sector, i.e. forecasts for holiday spending raised to a 6% gain from a 5% gain and strong same store sales, failed to excite much buying.
The action continued pretty much stagnant all through the morning, but even with the selling NASDAQ and SP500 never threatened a break below near support, just suffering some profit taking after the nice rally.
At 2:00ET (2 hours left in the session) the FOMC minutes were released, and there was a key line that investors focused on: a few FOMC members voiced concern that the Fed had to be careful and not go too far with its rate hiking. It wasn't an impassioned statement that the Fed was about to go too far or had to stop immediately, just a recognition that the Fed could go too far. Not much, but that the Fed even acknowledged it can go too far and put it in print was enough of a milestone to rally investors' spirits (remember, the Fed has never admitted it went too far in 2000; only ex-Fed members say that was the case).
Stocks suddenly gained purpose. Volume had languished but started higher along with stock prices. The market went from flat to positive and then some. Sure the news from the Fed was no clarion call, but as one trader put it, you can't put a small hole in a big balloon, meaning once the acknowledgement is made it is going to happen. If the Fed sees so much strength in the economy (as it said in the minutes), then to be talking about going too far is a very significant watermark.
As noted, the market saw it that way. Volume jumped as stocks rallied a very good indication that the big money is still coming to the market even after the gains the past month. Breadth was mediocre at best once again and new highs actually managed to fall even as the indices pushed higher. Those are the same Achilles heels that have plagued the latter parts of this move, though we do note that breadth has been strong on the critical sessions when the market rebounds from a pullback.
We can complain about the move, but this is what a holiday or year end rally does: it moves up on momentum. This one has the underpinnings of strong price/volume action and leadership; it is not just a momentum move. With the solid foundation found back in late October, that gives this move real substance. What we are seeing of late are the latecomers, the performance chasers jumping into the action to spruce up the year end books to show clients how smart they were to be in these leaders.
That is where a lot of the momentum comes from, but do we really care? We have not been looking for a run well into 2006, just a move to the end of the year. The October low was positive and it gave us a breakout and follow through. We are riding that to year end. Beyond that the market will have to show us what it will do. There are still major obstacles ahead, but perhaps this market is telling us that the Fed is going to get it right and energy prices are going to remain contained in 2006. Certainly the bond market is not forecasting inflation and perhaps it is just indicating more low or no inflation growth as in the nineties. There is a lot of gloom about Iraq as well, but the fact that the Sunnis are participating in the political process makes even that problem one that ultimately will subside.
As we noted Monday, however, that is speculation. We have to look at what the market is telling us now, and right now it continues to show very solid nuts and bolts, i.e. price/volume action and leadership. We will have to be on our toes when the new year comes around, but for now the market is in a very nice year end rally, and it is still finding reason to rally as seen Tuesday with the FOMC minutes.
THE ECONOMY
Fed shows it realizes it can go too far.
It was not some kind of unanimous statement that the Fed knew it could go too far and was just about done with the rate hikes. It said nothing about the Fed was ready to pause, stop, or cease altogether. Indeed, the Fed went on and on for pages discussing how the economy had overcome the shocks from the hurricanes and that even with the housing market slowing some the inflation risk was still the primary risk facing the economy as prices were supposedly being passed through to the consumer (just where that is happening is very unclear based on all of the data the government has released; indeed the data suggests the opposite).
Despite the rather offhand comment, however, the fact that the Fed admitted in writing, indeed its own writing, that it can go too far was a watershed event. As noted above, the Fed has never officially admitted that it went too far in the 1999 - 2000 rate hikes even before that last 50 BP kicker sent down the pipe in May 2000. Thus the implied admission the Fed could go too far and the fact it was raised in an FOMC meeting was remarkable in itself.
Moreover, given the Fed's view that the economy is still going to grow further even in the face of the hurricanes, higher energy costs, and the Fed hitting the brake pedal since June 2004, the fact that they are starting to talk about going too far is important, and the market took it that way.
Now it won't happen overnight. The Fed talked about the need to change its statement and how it would do that; that is a prerequisite to stopping, i.e. getting the 'accommodation' and 'moderate pace' out of the statement. Indeed, we take this as the start of that process because the Fed always recognizes the issue in its speeches or minutes before it makes any change. The ball is rolling now, and in the December meeting it is likely to make its first change in its statement. Indeed, in the minutes, despite the Fed's continuing concern about inflation, it also noted that statements from Fed members regarding inflation were taken too harshly by the financial markets and caused interest rates to rise and stock prices to fall. This all adds up to pretty clear indications the Fed is starting the process of winding down its rate hiking.
Bonds rally on the news, dollar falls.
That is clearly the way the financial markets interpreted it. We discussed how stocks viewed it, and the other financial markets took it the same way. Bonds rallied, meaning the yields fell. The two year bond fell particularly hard, and that immediately started correcting the pancake flat yield curve.
Indeed, it fell so sharply (from near 4.38% to 4.30%) that it dramatically changed the Fed Funds futures contract with respect to future rate hikes. Prior to the minutes it was pretty much a lock that the Fed would raise again in March, bringing the discount rate to 4.75%. After the minutes that was down below a 30% chance.
The market is still not ready to give up the two additional hikes to 4.50%, and that makes sense when you look at the timeline. As noted, the Fed liked to move in an orderly progression, discussing the next change in public before it makes the move. Thus it needs at least December and January to go through its usual motions of preparing the financial markets and telegraphing its move. Indeed, just two months and change is moving pretty quick for the Fed to make a major change in its direction without some catastrophe at hand. If it is going to do this we anticipate we will hear more in the speeches and statements of Fed presidents and governors over the next several weeks.
Gas price declines help boost holiday sales expectations.
The National Retail Federation, citing a much faster decline in gasoline prices than anticipated, adjusted its holiday sales growth forecast up to 6% from 5%. This marks the first time the NRF has ever raised its forecast during the season, and that tells us that it is already seeing stronger sales than anticipated.
That is exactly what we are hearing and what we reported three weeks back: retailers are playing a smarter game this year by offering early season sales to prime the pump and get consumers ready to spend. The past two years the retailers and consumers played chicken, waiting each other out for the sales. This is a much smarter tact, and it is apparently working.
Indeed, the RTF notes that every retail category has seen strong sales growth in the past few months. That is carrying up right to Thanksgiving, the point where the real holiday shopping is seen as starting up. Further, same store sales for the week bolster this view, jumping 1% versus declines the week before. Year over year they rose 3.6%, continuing a basically continuing uptrend in retail sales despite the higher energy prices encountered during all of 2005.
THE MARKET
MARKET SENTIMENT
VIX: 10.6; -0.22
VXN: 14.01; -0.1
VXO: 10.03; +0.06
Put/Call Ratio (CBOE): 1.05; +0.25. Moved over 1.0 on the close, typically an incongruous move in a market rally. There were several issues in play. Shorts (playing puts) were covering their positions. Covered call players were buying back calls. Upside players were selling puts to take in the premium, buying them back when the market rises.
Thus you can say this has no predictive effect but as always, these indicators show extremes. This market move has been ongoing since the bottom in October. It is now getting plenty of press on the financial stations and elsewhere. Thus we can start looking at this as an indication that the move is getting long in the tooth. It is just one close, however, and this takes several to start showing the move is starting to falter. We will also see weakening leadership and deteriorating price/volume action before that happens.
Bulls versus Bears:
Bulls: 53.1%. Another strong surge higher from 50.6% as bulls head toward the 55% level that indicates an excess number of bulls and alerts you to watch for signs of deterioration in the price/volume action and leadership. Hit 44.8% on the low on this leg, just above the 43.5% low in May.
Bears: 22.9%. Down from 24.7% and heading toward the 20% level that is considered bearish as too few are skeptical of the market. It hit 29.2% on the high this cycle, just below the 30% level hit in May when the market bottomed at that time as well.
NASDAQ
Stats: +11.89 points (+0.53%) to close at 2253.56
Volume: 1.917B (+11.61%). Volume was sluggish until the FOMC meeting and then it started higher, outpacing Monday and surging back above average. Another accumulation session as NASDAQ pushed higher, driven a lot by big money chasing performance.
Up Volume: 1.109B (-20M)
Down Volume: 735M (+178M)
A/D and Hi/Lo: Advancers led 1.22 to 1. Very modest breadth again on an upside session. Again we note that breadth was strong on the key sessions that resumed the breakout moves after test.
Previous Session: Advancers led 1.63 to 1
New Highs: 183 (-29). Very disappointing that new highs are not jumping as the indices move. That makes this look more like a year end rally for now.
New Lows: 45 (-11)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped lower after NASDAQ extended its breakout Monday, and was slogging around on low volume, holding well above support (2219, 2207). Then the afternoon rally hit, aided by the FOMC minutes, and NASDAQ rallied on volume into the close, hitting a new post-October 2002 high. A strong move up the 10 day EMA continues. Overbought at this point for sure as the morning gap showed, but still ready to rally as big money continues to chase performance and as NASDAQ does lead the move higher.
SOX rallied to the 2005 high (486.34) but then backed off to close, still unable to make the breakout from its four month range. This was our anticipated peak for the index on this move before needing a breather to regroup and try to break back through. The other indices, e.g. NASDAQ and SP500, will need SOX to make the break to keep the move alive. We need to keep in mind that there are still four weeks left in this year and it can pause again and still drive higher to finish.
SP500/NYSE
Stats: +6.38 points (+0.51%) to close at 1261.23
NYSE Volume: 1.679B (+8.28%). Volume rose above average as well on NYSE as SP500 pushed its breakout further and SP600 rallied to its 2005 high.
A/D and Hi/Lo: Advancers led 1.46 to 1. More mediocre breadth on a continued move higher.
Previous Session: Advancers led 1.67 to 1
New Highs: 211 (-18). Similar to NASDAQ, the new highs are not increasing in strength as SP500 pushes higher and SP600 pushes at its 2005 high. Again, that is a weakness in this move as it continues higher and particularly as we approach 2006.
New Lows: 161 (-8)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
An early dip on the general weakness, but held above 1246 (some view 1250 as significant support but it is more a psychological level) on the low and then rallied into the close. Stronger, slightly above average volume, modest breadth and new highs. It was no barnburner of an upside session, but given the size of the move to this point, not bad action at all. As with NASDAQ, SP500 is overbought at this point but that is nothing new for holiday rallies with plenty of momentum and strong technical underpinnings.
SP600 rallied as well, but it came just shy of a new 2005 and all-time high, hitting 357.29 on the high (closed at 356.73; 2005 high is 357.86). Similar to SOX, SP600 has lagged the move and is just now challenging the high. It will need to make the breakout and rally in order to sustain the other indices. It could make the move here and then come back to test just as with NASDAQ and SP500 when they made their moves, but both it and SOX have already run quite a distance just to reach this point. Overbought and in need of a rest to really take on that resistance.
DJ30
DJ30 rallied as well, moving past the December 2004 peak (10,868) on its way to the March 2005 high (10,985). Volume was back up above average as it continued the move, showing solid strength along with the rest of the market. After this run and its struggles we would not be surprised to see it hit the high and then struggle to advance from there without a consolidation.
Stats: +51.15 points (+0.47%) to close at 10871.43
Volume: 311M shares Tuesday versus 250M shares Monday. Back above average as DJ30 gathered some more strength on this move.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
All the data for the week is pushed up to Wednesday, the last full day of the week. Jobless claims, Michigan sentiment, crude inventories are all out and have the potential to influence a market that will likely have light volume ahead of the holiday. Tuesday volume jumped when the FOMC statement was out, and those institutions that were driving the higher volume will likely feel they have done their work for the week.
Without the big institutions we could see a similar start Wednesday to the Tuesday slow start. Some of the data might push it, i.e. a strong consumer sentiment report and a strong oil build (it was a weak reading last Wednesday that gave oil a foothold to rebound as it has done). Moreover, it was recovering off its lows before the FOMC minutes hit, so there was some underlying strength. Whether that is enough remains to be seen; Tuesday was very sluggish to start as the market was showing some wear and tear from the strong move and needed a push to get rolling.
Further, there is suddenly talk about 'technical breakouts' in the indices. Well, NASDAQ and SP500 already made their breaks while SOX, SP600 and DJ30 have yet to do that. As noted above, the latter have run a long way just to get to the point of challenging the highs; the gas tank is likely running a bit low after that run. The recognition of the 'breakouts' Tuesday is a bit late, and as with most news commentary it falls into the sentiment category and is a contra indication.
Thus we could see more weakness Wednesday at some point given the market was wandering all morning Tuesday in search of a catalyst. It got one Tuesday. As noted, it could get one Wednesday if oil inventories are strong; that indeed could be enough to help it Wednesday and the half session Friday given oil is one of the factors the market will be looking at right as the year ends just as it did in 2004.
In sum, the market is a bit overbought on this move and the early Tuesday action shows us it will need a catalyst to keep it going near term. It could get it with the oil inventory data. What we are going to do is be quite selective with new positions. If we see a strong move from a stock in position to move higher we won't back off, but a pullback to consolidate the recent strong move would give us an overall better entry for new plays. We anticipate we get another session or so run higher and then a test after the holiday to try and set up one more push higher to the year end.
Support and Resistance
NASDAQ: Closed at 2253.56
Resistance:
2251 is the January 2001 low (2273 is the closing low)
2264 from the June 2001 peak
2328 from the May 2001 peak
3015 is the December 2000 peak and the October 2000 low
Support:
2220 is the August high
2205 was intraday resistance last week 2192 from the January intraday high and the mid-July high.
2187 is the September high.
2178 is the January closing high
The 10 day EMA at 2211
The 18 day EMA at 2186
The January 2004 high at 2154
2144 is the October gap up point.
The 50 day EMA at 2150
2100 was key resistance and support in the past
The 200 day SMA at 2084
S&P 500: Closed at 1261.23
Resistance:
1273 is the May and May 2001 peaks
Support:
The August high at 1246
The September high at 1243
The recent highs at 1238
The 10 day EMA at 1240
The 18 day EMA at 1230
March 2005 closing high at 1225 and intraday high at 1229.11
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1218
1210 held in late September on the close.
The 200 day SMA at 1203
1200 was solid price support at one time
1190 from prior prices
Dow: Closed at 10,871.43
Resistance:
10,868 is the December 2004 high; cracking through that level
10,985 is the March high
Support:
10,754 is the February high
10,720 is the high in the recent lateral move. This is the key resistance.
The 10 day EMA at 10,718
The June highs at 10,646 to 10,656
The 18 day EMA at 10,636
Price consolidation at 10,600
The 200 day SMA at 10,506
The May high at 10,406 and 10,400, the bottom of the November/December range
10,350 was support in the recent August and September pullbacks
10,250 held in the June and July lows but is blowing out now
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
November 21
Leading Indicators, October (10:00): 0.9% actual versus 0.8% expected and -0.8% prior (revised from -0.7%)
November 22
FOMC Minutes, November 1 (2:00): Inflation is still an issue as economy rebounding well after hurricanes. Raised issued of not going too far.
November 23
Initial Jobless Claims, 11/19 (08:30): 312K expected and 303K prior
Michigan Sentiment-Rev., November (09:45): 81.0 expected and 79.9 prior
Help-Wanted Index, October (10:00): 39 expected and 39 prior
Crude Inventories, 11/18 (10:30): -2159K prior
End part 1 of 3
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